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December 31, 2009

Financial honesty not literacy in the new year...

By Cindy Ivanac-Lillig

2010 is quickly approaching and your favorite financial resolution is probably back on the table. It is most likely some form of: I will spend less on frivolous coffee or I will make a budget and save x% of my paycheck. These resolutions are not related to financial literacy, but perhaps to financial honesty. I always joke that I am extremely financially literate and could even happily chat at a holiday party about equity risk coefficients, but I can't seem to bring myself to create a budget. After all, the budget may require that I eat at cheaper lunch locations and well, the "costs" of going to eat at the cheaper lunch location just seem too high relative to the "benefits." Or could it be that I am just not being that honest with myself about the "costs" and the "benefits" of my lunch hour?

I read a short article today about 6 things we can all do -- regardless of age -- to help make the best financial decisions. It was pretty hum drum in terms of advice but it hit on a few new "apps" available on the iphone that are designed to track daily expenses. I know that there have been small notebooks and pencils around for this same purpose for hundreds of years, but something about these "apps" made me think that this could work. You see, there is no need for a grand budget right away (as I tell myself), but perhaps just tracking spending alone would help with the honesty bit. And perhaps this is the time to look into this tech option as we are all attached to our darn phones all day anyway -- how hard could this be?

My new New Year's resolution: figure out easiest way to track daily expenses and see if it changes my cost/benefit analysis.

Some of the application suggestions and my unqualified first impression:
Every Nickel: Seems super easy -- just tracks daily expenditures
iexpenseIt: Seems pretty easy as well; allows you to incorporate a bit of budgeting if you so choose
Splash Money: Something for those that are more adventurous and want to connect to their bank accounts (also available for blackberry)

Let me know what you think.... (and if you have ever used anything similar in a classroom setting, I would love to hear about it). Happy New Year and Good Luck!

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December 22, 2009

Training “Second Best” Thinking….

By Cindy Ivanac-Lillig

The theory of “second best” basically states that if one condition cannot be met in a model, meeting the remaining conditions may not necessarily give you the next most efficient outcome. In other words, one condition not being met fully sometimes requires other conditions to be abandoned to get a “second best” result. Here is a more precise definition for those interested.

I recently read an article about the Fed by Paul McCulley entitled, “Because I said so….” I didn’t necessarily agree with all his arguments, but he did make me think differently about the subject matter and how it could be used effectively to teach macroeconomics. McCulley paraphrases a Deputy Governor of the Bank of England, Charles Bean, who says that in the absence of a powerful global macro-prudential regulatory regime, central bankers will have to seriously consider the “second best” option of incorporating asset prices more explicitly into their Taylor-like rules –if that is what is necessary to enhance prospects for systemic stability.

Many economists believe monetary policy decision-making does not need to take into account asset prices because aggregate demand data will essentially point in the same direction policy-wise. Because of that, they conclude, there are not many benefits and, in fact, many potential pitfalls in trying to incorporate asset prices and more specifically asset bubbles (which are notoriously hard to predict) into decision-making models. However, here we are at the end of 2009 and the question of asset bubbles haunts central bankers and economists all over the world. Did the well accepted central banking “condition” or assumption fail in terms of asset prices reflecting aggregate demand data? If, as McCulley states, the Fed’s “reaction function” is flawed in this way, what is the “second best” option?

Perhaps questions like -- what will be the likely outcome if asset prices are not incorporated into decision-making processes in the future and what other options are available to central banks to deal with this issue -- need to be answered before accepting the simple explanation that there isn’t a good theoretical way to incorporate asset prices into existing monetary policy thinking.

Regardless of your opinion on McCulley’s article, learning how to think about what is “second best” is important. The article reminds us that “second best” thinking divorces the perfect from the near perfect. They are not always just one tweak away from one another. In fact, they can be somewhat distant from one another. I think what Governor Bean is saying is that you may actually have to distort something else to deal with existing issues in the next best way.

I think a really interesting assignment would be to ask students to find examples of “second best” decisions being made. What markets and/or policies illustrate how further distortion was necessary in order to get a “second best” solution? What were the other alternatives?

Please share your thoughts on either the article or an assignment idea....

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Posted by Cindy at 9:19 PM | Comments (4) | TrackBack

December 11, 2009

Christmas card illustrating Americans' compassion or lack thereof....

By Cindy Ivanac-Lillig

Ever thought about putting a supply and demand graph on the front of your Christmas card -- check this one out on the Economix blog -- click here. Pretty funny, huh? More seriously though, I think that Reinhardt's conceptual idea is interesting. Does compassion adhere to supply and demand theorems?

The author, in a playful way, asks the reader to think about whether or not Europeans are more compassionate than Americans -- or is it just that Europeans can afford to be more compassionate? It is an interesting context for the theory of supply and demand especially given our current conversation about health insurance reform. If our equilibrium price is too high for kind acts, then maybe we should all revisit our intro textbooks and look at what factors would increase supply and in turn lower the equilibrium price and increase the quantity of kind acts towards the poor. Hmmm....

What other difficult societal issues can be looked at through the lens of supply and demand? For my readers that are educators, maybe this would be a really interesting assignment....

What do you all think?

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